Ultra Clean - Q4 2020

Transcript

Operator (participant)

Good afternoon, and Welcome to the Ultra Clean fourth quarter and full Year 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.

Rhonda Bennetto (SVP of Investor Relations)

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Scholhamer, Chief Executive Officer, and Sheri Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business, and Sheri will follow with the financial review, and then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the risk factors section in our SEC filings. All forward-looking statements are based on estimates, projections, and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. And with that, I'd like to turn the call over to Jim. Jim?

Jim Scholhamer (CEO)

Thank you, Rhonda, and good afternoon, everyone. We appreciate your time today. I'm going to start with a short review of our full-year results and briefly touch on our fourth quarter performance. Then I'll share my thoughts on the industry and how technology advancements are benefiting UCT as we execute on our growth strategy before turning the call over to Sheri for a financial review. Then we will open up the call for questions. For many reasons, 2020 was unlike any year we've ever seen, but by every measure, it was an extraordinary one for UCT. I must start by thanking our global employees for their commitment, resiliency, determination, and drive to be the best. The team rose to the challenge and continued to exemplify our culture of integrity and teamwork, producing some of the best financial results we have seen in our 30-year history.

UCT ended 2020 with a record total revenue of $1.4 billion, record operating margin of 11.3%, and record EPS of $2.80. While significantly outgrowing the overall WFE market by 11%, to reach these extraordinary milestones in a year fraught with challenges, we continuously adjusted to the changing work environment while staying focused on meeting customer demand and delivering strong returns to shareholders. The fourth quarter benefited from ongoing strength in foundry and logic, as well as increased demand in memory as customers planned for expansion and equipment investment in 2021 and beyond. Both our product and service divisions saw increased engagement across all segments of the market, resulting in another quarter of growth and improved operating leverage. UCT remains solidly on track to outpace the accelerated growth of our served markets again in 2021. Technology advancements within our data-driven economy continue to fundamentally change how we live and work.

This digital transformation is accelerating the adoption of semiconductor growth drivers such as artificial intelligence, high-performance computing, IoT, and 5G. Capital intensity at the leading edge is increasing to support a more diverse set of end-use markets, which provides confidence for strong multi-year WFE demand. Our business is well-balanced, and both our products and service businesses have broad exposure across all device types. This bodes well for UCT as we continue to engage in the early stages of customers' technology roadmaps. A key component to UCT delivering on its long-term growth strategy is the acquisition of Ham-Let. The pre-close and integration planning process is going very smoothly, and we are excited to begin operating as one company after closing, likely early in the second quarter.

Adding Ham-Let to our growing suite of vertical capabilities will support our customer partnerships with a significantly broader, higher value, higher margin portfolio of market-leading product solutions. You'll recall that Ham-Let's components are used primarily within our current gas panel product line, as well as for gas distribution throughout semiconductor tools. In addition, gas delivery is a significant element of the subfab infrastructure within chip-making facilities, providing an additional platform for growth. By leveraging UCT's solid customer relationships and global operational footprint, we see a sizable opportunity to grow Ham-Let's 5% share of a $2 billion market. UCT's new facility in Malaysia remains on track to begin initial production in the third quarter this year. This state-of-the-art facility will enable us to better serve and bring value to our local and global customer base. The facility enables us to provide additional capacity, ensuring business continuity to meet ongoing demand.

There has never been a better and more opportune time to be a manufacturing leader in the semiconductor industry. Our customers and their customers are well-positioned at the forefront of this technology renaissance, and we see our existing partnerships expanding with them as they hasten to advance their technology roadmaps. Our comprehensive portfolio of product and service offerings, together with our strong fiscal discipline and resilient business model, will drive continuous long-term performance and profitability, with the goal of returning even more value to our shareholders. Our guidance for the first quarter reflects an increase in business across our entire customer base. Industry sentiment, backed by our internal market analysis, projects momentum continuing through 2021.

Before handing the call over to Sheri, I want to again thank our employees and our suppliers for their incredibly hard work this past year, and we look forward to again outperforming the markets we serve in 2021, and with that, I'll turn the call over to Sheri to review our financial performance.

Sheri Savage (CFO)

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. Total revenue for the quarter was $369.6 million, up 1.7% from the prior quarter. Our products division grew 1.7% to $299.5 million, and our services business was up 1.8% to $70.1 million, both on increased demand across the customer base. Total revenue for the year was a record $1.4 billion, up 31.2% from the prior year. Products generated revenue of $1.1 billion, and services contributed $267.4 million, up 34.5% and 18.7% over 2019, respectively. Total gross margin for the fourth quarter remains at the high end of our model at 21.5% compared to 21% last quarter. Products gross margin was 17.8% compared to 17.5%, and services gross margin was 37.5% compared to 36% last quarter.

Margins can be influenced by customer concentration, geography, product mix, and volume, so you can expect variances quarter to quarter. Total gross margin for the year was 21.4%, up from 19.3% in the prior year. Once the Ham-Let acquisition is closed, we will take the opportunity to review and adjust our model. Operating expenses for the quarter were $35.7 million compared to $34.3 million in Q3 due to typical costs related to year-end. As a percentage of revenue, operating expenses increased to 9.7% compared to 9.4% in the prior quarter. As a result of our revenue increasing by 31.2% year-over-year, operating expenses as a percentage of revenue declined to 10.1% compared to 11.5% in the prior period. Total operating margin for the quarter increased to 11.9% compared to 11.6% in the third quarter.

Margin from our products division remained flat at 10.8%, and margin from our services division was 16.3% compared to 14.9% in the prior quarter. Total operating margin for the year was 11.3%, a significant improvement from 7.8% in the prior year due to higher volumes and ongoing management of expenses. Based on 41.4 million shares outstanding, earnings per share for the quarter were $0.81 on net income of $33.5 million compared to $0.73 on net income of $29.9 million in the prior quarter. For the full year, earnings per share were $2.80 on net income of $115 million compared to $1.16 on net income of $46.5 million in 2019. Our tax rate for the year was 18% compared to 18.1% last quarter. For the full year, our tax rate was 18.4%. We expect our tax rate for 2021 to remain in the high teens.

Turning to the balance sheet, our cash and cash equivalents were $200.3 million at the end of the fourth quarter compared to $176.1 million last quarter. Cash from operations was $44.4 million, an increase of $24.7 million from the prior quarter. For the full year, our cash from operations totaled $97.3 million. We have made significant progress paying down our Term B loan over the last couple of years. During 2020, we made additional voluntary Term B loan payments totaling $18.4 million, bringing our total debt repayment for the year to $25 million. A key component of our overall growth strategy is to ensure we are ready to capitalize on expansion opportunities while maintaining an ideal level of operating leverage. As mentioned in our last call, we are currently reviewing our capital structure to support this strategy so that we may conserve a healthy balance sheet and maintain flexibility.

We anticipate revenue for the first quarter to be between $375 million and $405 million, and EPS in the range of $0.80-$0.93. And with that, I'd like to turn the call over to the operator for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Tom Diffely with DA Davidson. Please go ahead.

Tom Diffely (Managing Director and Senior Research Analyst)

Yeah, good afternoon. First, I wanted to check on the Ham-Let acquisition. It sounds like the close was moved from the first quarter into the second quarter. I was wondering if there's any big hiccups at this point?

Jim Scholhamer (CEO)

Yeah, hi, Tom. We really don't consider it close to moving. We talked about it being at the end of the first quarter, early second quarter, and we are still projecting in that timeframe, again, most likely early second quarter. We're still waiting for one clearance from one government, but we don't see that there'll be any issues with that.

Okay, that sounds good and then when you look at the ramp in Malaysia, it sounds like it's on track for the third quarter. What do you do between then and now to ramp up capacity if you need it? Obviously, things are getting stronger in the first quarter, but then if they grow again in the second quarter, will you have enough capacity on hand before the facility is done to handle?

Yes, absolutely. I mean, we always have a significant amount of burst capacity and different things that we can do with overtime and extended shifts and things like that. So definitely, it's not a concern in the short term. Obviously, as we see 2021 and 2022 continuing to strengthen in the long term, that additional capacity in Malaysia is going to really pay off for us. But yeah, there'll be no constraints in the near term.

Tom Diffely (Managing Director and Senior Research Analyst)

Okay. And then final question, when you look at the kind of consensus view up there for 15% growth in the industry, everything you've seen correlate with that?

Jim Scholhamer (CEO)

Yeah. Yeah, we see obviously the 15% number that a lot of people are talking about definitely seems like a reasonable estimate. There have been a lot of announcements, especially on the foundry side of things, to support that, and as well as memory moving into more capacity adds in this year versus the node expansions that they were mostly focused on last year. So we still think everything's lining up really well for strong growth in that range for 2021.

Tom Diffely (Managing Director and Senior Research Analyst)

Great. I appreciate your time today.

Jim Scholhamer (CEO)

Yeah, thank you, Tom.

Operator (participant)

The next question is from Krish Sankar with Cowen and Company. Please go ahead.

Krish Sankar (Managing Director)

Yeah, hi, thanks for the question. I had a couple of them, Jim. Just to follow up on Tom's last question, you said that you expect the outperformance to continue. So if you think WFE is going to be up 15% this year, is it fair to assume your revenues could be higher than that?

Jim Scholhamer (CEO)

Yeah, obviously, we're not guiding for all of 2021, but our target is to always outgrow WFE, and we've outgrown that on an average of about 10 points over the last five or six years. Obviously, some years are higher and some are lower than others, depending on many factors. But yeah, our aim is to continue to outgrow WFE by roughly an average of 10 points.

Krish Sankar (Managing Director)

Got it. Got it. And then, Jim, I think in the last call, you kind of spoke about some potential approved designs into ASML. I'm kind of curious, when do you think the transition to tangible revenues?

Jim Scholhamer (CEO)

Yeah, as I mentioned, that's a kind of a long-term goal over a few years, and there's several reasons. A lot of the wins and a lot of the work that we're doing are on our next-generation tools in the litho space, and so those obviously have to go in and get adopted, and then they have to ramp up on their own, and also, the wins come in chunks along the way. They don't come in one big movement of operations into ours. So you see on any given quarter, you'll see several wins in certain submodules and modules or components.

As those continue to kind of stack up on each other over time, as well as the new tools really start to roll out as they introduce them to the market, that's where we see kind of a slow general growth over the next several years and our target to get that space up to a reportable segment.

Krish Sankar (Managing Director)

Got it. Got it. And then a final question for Sheri. Looks like the Malaysia facility is on track for the second half ramp. I'm just curious, how should we think about gross margins, at least in the second half of this year, as that facility ramps up?

Sheri Savage (CFO)

Yeah, I think we'll take a look at how that will affect our model over the course of the year. Right now, we see ourselves still at the high end of our model, especially now that we're starting to get into the $1.5 billion-$2 billion bucket that we put out in our model. So we'll see some increase in margin, but we will see how that flows through with the volume of revenue that flows in at the latter half of the year.

Krish Sankar (Managing Director)

Got it. Thanks, Jim. Thanks, Sheri.

Sheri Savage (CFO)

Thank you.

Operator (participant)

The next question is from Quinn Bolton with Needham & Company. Please go ahead.

Quinn Bolton (Managing Director of Equity Research)

Hey, guys. Congratulations. Just wanted to follow up on the last question just about the gross margin effect from Malaysia. I assume that as that comes online, you were saying that you think that that's margin accretive and can be a tailwind in the second half. I just want to make sure I got your comment correctly.

Sheri Savage (CFO)

Yes, it just really depends on the amount of volume going through. So obviously, it is a lower-cost region for us, and that will obviously help us from a labor perspective. The volume is really the key thing there in terms of how much goes through. But yes, it could be helpful to continue to have us be at the higher end of our gross margin model and possible expansion. We will be looking at our model, as mentioned before, once the Ham-Let acquisition comes into play, and we'll be taking a look holistically across all of our product lines to provide an updated model based upon that.

Quinn Bolton (Managing Director of Equity Research)

Great. Second question for me, the services business actually growing in the fourth quarter surprised us. I thought you were looking for potentially a step back in that business in the December quarter as one of your large customers went through a fab transition. Doesn't look like that had an impact on the business. So just wondering if you could give us a little bit more color on the services business, and do you expect that to grow sequentially in the March quarter?

Jim Scholhamer (CEO)

Yeah, we saw some, yeah, you're right. We definitely saw a temporary slowdown from the Israel Logic side, as we had talked about before. We saw a little bit more strength in the memory side of things in Korea than what we had anticipated. And I think we do see that we'll continue. And then with the fab conversion kind of coming back in Logic and in Israel there, we would expect to see service continue to grow sequentially over the next quarters.

Quinn Bolton (Managing Director of Equity Research)

Great. And then the last question for me, I understand you're not giving guidance for the full year, but it sounds like 15% WFE growth, you guys target growing faster than that. Can you make any comments about linearity, sort of first half versus second half? Has there been some debate in the industry as to whether it's a front-half-weighted year or more of a balance or even a second-half-weighted year. Just any thoughts you have on kind of first half versus second half would be helpful.

Jim Scholhamer (CEO)

Yeah. Yeah, we've been following those comments as well. Obviously, the first half benefits from improved visibility, and it looks pretty strong. As we look at the end market fundamentals, though, I think a lot of the second half and 2022 and increasing the strength kind of compounding from that is kind of a little bit dependent on some more NAND capacity adds versus the technology moves and also memory, which is starting to add capacity, continuing to accelerate. So it's really difficult to call. I mean, obviously, people call the first half because that's what we can see pretty clearly. But I don't know if I would make a call at this point that the first half is going to be stronger than the second half. I think it's really too early.

I kind of look at it as the first half is pretty strong, very strong. And then we see a lot of downstream indicators that there's no reason why the second half shouldn't continue. But there's always the caveat of any unusual events that occur. So it's really too early to say. I think the entire year being pretty strong is definitely there's a consensus on that. And if there is any waiting, I don't think it would be significant. That's kind of my view.

Quinn Bolton (Managing Director of Equity Research)

Great. Thank you, Jim.

Operator (participant)

The next question is from Patrick Ho with Stifel. Please go ahead.

Patrick Ho (Managing Director)

Thank you very much for taking the question, and congrats on a really nice end to the year. Jim, maybe first off, staying on the services side for a second, on the parts cleaning business, typically utilization rates are a key driver for that business, and obviously, you saw that on the memory front, but could you talk about any potential incremental increases in that business due to the complexities of devices, maybe more specifically on memory, both for NAND and DRAM, as they get more complex? Do you see "increasing," I guess, content or increasing services use because of the complexities of those devices on top of high utilization rates?

Jim Scholhamer (CEO)

Yeah, I think that's a fair assumption. That definitely you could see the cleaning cycles accelerate like they are towards the leading nodes and not Logic, which would obviously cause a higher cleaning intensity, if you would. And in addition to that, it also requires more of the leading-edge kind of cleaning applications and more complex approaches to it, which obviously fits well into our bailiwick. And then third, then you still have Logic pushing some pretty extreme dimensions with 7 and 5 and 3 nanometer, which is adding new requirements to cleaning, which is so the coating and the texturing of the parts for yield and particle control is starting to become a more significant added process that you don't tend to see at those older nodes.

So I think there's kind of three factors that really come into play that should help the cleaning and analytics business to really maybe start to part ways with wafer starts and actually grow a little faster. But I think it's kind of early days to see how that happens. But I think that's definitely something kind of cooking, is that those forces are building up. You're also seeing a lot of those devices start moving into more vacuum-based, even some of the litho applications that started to become more vacuum-based. So you see another tailwind coming on there. So all those things added together bode pretty well for that segment of the industry to really grow at an accelerated rate.

Patrick Ho (Managing Director)

Great. That's helpful, Jim. And maybe as my follow-up question, you guys performed really well last year in 2020 despite the pandemic issues. Can you describe the supply chain or the supply situation that you have right now and whether you feel you can meet the increasing demand that we're seeing in the current environment?

Jim Scholhamer (CEO)

Yeah, I think in Asia, the effect on the COVID on the supply chain the last few quarters has been minimal to almost nothing. Obviously, in the U.S. and in Europe to some extent too around the holiday season, it was definitely something in the fourth quarter that we had to deal with. With the suppliers, UCT's hasn't been directly impacted in any way, any significant way by any COVID events. And we saw that at the beginning of the quarter that we're in. But I think we're seeing less and less of COVID-related supplier issues. Now it's the typical issues when you're ramping the supplier issues that come up. But it's not so at this point, at this point in time, knock on wood, it hasn't been anything that has been really materially impacting our ability to get our output.

Patrick Ho (Managing Director)

Great. Thank you very much.

Jim Scholhamer (CEO)

Thank you, Patrick.

Operator (participant)

The next question is from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab (Senior Research Analyst)

Great. Hey, Jim, I just have one quick question, follow-up on memory. Have you seen any change in the last 90 days in your outlook between DRAM and NAND?

Jim Scholhamer (CEO)

Not much of a change. I mean, NAND is still kind of where we saw people starting to continuing the transition to the 128 layers. I think in the last quarter or two, we start seeing the 176 layer pilot production start up. That was anticipated, though, but we're starting to see some of that kind of pick up. But no real major capacity adds yet in NAND, and NAND's still a little bit kind of like the last cylinder to kind of really go forward with capacity. DRAM is kind of moving along as we expected after the prices stabilized, after the utilizations of the fabs, existing fabs went up. We started to see DRAM capacity, especially in Korea and in Xi'an. Some areas we started to see DRAM capacity adds start to roll in, which we also anticipated.

So I mean, those things are happening, but I think that was kind of how we saw the year rolling out.

Christian Schwab (Senior Research Analyst)

Okay. The only reason I ask is some of our techs have suggested that NAND utilization rates have meaningfully improved since December. And so it appears that that improvement has not yet led to any dialogue that you're hearing regarding increased wafer starts yet. Is that fair?

Jim Scholhamer (CEO)

That's correct. Yeah. The first indicator is those utilization rates going up. Yeah, the next step is typically then discussions around or plans around the capacity adds, and that's still we haven't seen that take place yet.

Christian Schwab (Senior Research Analyst)

Great. No other questions. Thanks, guys.

Jim Scholhamer (CEO)

Thank you, Christian.

Operator (participant)

Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Jim Scholhamer (CEO)

Thank you very much for joining us today, and we look forward to speaking to you again next quarter.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.